Looking at the , you can see that the SPY has plummeted — closing slightly below the bottom of the channel. If you recall from my 3/3 post, I said "You can see that the 200 is converging with the bottom of the channel, as it nearly disappears into the . This convergence is strengthening the bottom of the channel as support, but if it is broken, the bears will take out two major levels in one fell swoop." As you can see, that has happened exactly. The bottom of the channel has fallen, and the EXTREMELY important 200 has fallen with it. For those of you that don't know, the 200 is an institutional moving average, that institutional investors watch very closely. With that said, developments like this don't go unnoticed. So the SPY has closed below the channel and the 200 .
Now, there are a lot of fundamental reasons why equity markets are facing pressure. They range from interest rate hikes, to trade war fears, questionable valuations, enormous pressure on bonds, the charts being technically overextended, a new Fed Chairman, and many other things. Regardless, the charts tell us everything we need to know. The SPY here, is telling us that the stock market is about to experience some intense downside pressure, if a swift recovery doesn't materialize. In reality, however, a recovery doesn't seem imminent. The is rolling over violently, as the sell-side momentum explodes to the downside under a crossover. is also primarily red, and Friday's bar was well above average, causing the market to close at the lows of the day, beneath the 200 and the channel. So a massive selloff may be imminent, as investors lock in the enormous profits that they've made since Trump took office.
The question is, do we see some of the enormous profits start to rotate out of equities, and into other asset classes, such as the beaten down crypto space? I think that is definitely a possibility, but we will have to wait for the stock market selloff to really accelerate, to know for sure. Obviously, assets like gold are going to get a boost, and thankfully, I have been long the GLD through options for a few months now. My point is, stocks are almost certainly going to plummet, and rightfully so, given the growing list of cons to owning stocks right now. This could be the breath of life that crypto needs.
I'm the master of the charts, the professor, the legend, the king, and I go by the name of Magic! revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
-Magic loves you-
Cons: everything else. Highly risky speculative asset that is digital. A lot of issues surrounding the digital space right now with social media and a risky volatile, non physical asset. Might have people worried and not invest into anything. Most people do not even understand crypto. I guess we will see.
From other research, we know that these are two major factors that influence price action. Just as an example, another paper documents how 2 bots were able to drive BTC prices from $250 to it's ATH in 2013. This would invoke both information asymmetry and liquidity issues as they relate to what could be a "fair" price. Having an information advantage and being able to control liquidity (i.e. if you're the exchange you can "credit" yourself Bitcoin and/or dollars to influence the market) might precipitate a crash as a prisoner's dilemma plays out where everyone rushes for the exits at once. In a more transparent and fair market perhaps this "bubble" effect would be more subdued and liquidity would also be deeper due to lower volatility. So I think in the case of 2013-2014 you have to look to the very obvious factors that played into both the "bubble" and the crash (i.e. Mt. Gox and the Mt. Gox bots).
As far as asset rotation goes, I'm not sure how you came up with the conclusion that higher VIX = rotation to crypto as we have seen that LOWER VIX = rotation to crypto (which I thought you said in your paper). Given diminishing returns from other yield generating assets due to low interest rates there has been a significant rise in speculative investing behavior all across the board. This is standard for the market and Bitcoin and crypto as an asset class have seen a big range of VIX but generally has yet to experience a high interest rate business cycle and since this bull run started late 2016 we've seen VIX at persistently low levels as a result of growth expectations from corporate tax cuts. Higher interest rates signal higher costs and lower expected returns so the higher volatility that ensues signals risk aversion and that's why money gets pulled from equities, real estate, etc. and put into safe havens. Given that Bitcoin has proven to be less a safe haven than a highly speculative asset class in which volatility is a key feature, it would make more sense that equities and other investments rotate into haven assets while crypto sees some money rotate into other speculative, but better regulated asset classes (like Gold, VIX, FX ) that start providing better returns as equities see a correction/possible bear market.
Given that crypto has zero correlation to any asset class the rise of crypto seems to me a symptom of central bank distrust. Given that this is likely to continue in perpetuity I don't think there's any particular "rotation" that's likely to happen other than increased allocation from traditional and institutional investment that has yet to happen due to the lack of regulatory oversight in crypto markets. Given the current trend should we start to see the CFTC and SEC clean up some of the mess left by 2017's crypto bull run and institutional entities such as exchanges catch up in developing better platforms and better customer service I think we will naturally see continued "rotation" into crypto as it is still on a tremendously positive growth trajectory. Any other asset class that goes 26.5X in less than a year then gets cut down to 11.33X would still be celebrated, but instead, we're seeing all this negative talk as if Bitcoin is "dead" when the reality is that smart money is watching this all play out and choosing an optimal entry point that makes sense given regulatory and other risks.
As a corollary to the idea that crypto is fundamentally an asset class driven by speculation when Bitcoin becomes "overbought" and sees diminishing returns in a bull market you see rotation to altcoins as they become relatively "cheap" and provide higher potential yields for speculators. Then in a bear market this rotation reverses. Rather than calling this "rotation" I would call it a "substitution effect".